The Stochastic Oscillator helps us detect the overbought and oversold regions. It is one of the most used indicators for short term strategies in the Forex market. It is an oscillator that allows us to see whether the price for giving a buy-sell signal for the financial asset is in the overbought or overbought zone.
The Stochastic Oscillator, created by George C.Lane, gives a BUY- SELL signal according to two curves called %K and %D and the changes these two curves make depending on the reference levels of 20 and 80.
Stochastic Oscillator which draws on from the 3-period simple moving averages and 5-period simple moving averages is followed especially by traders seeking benefit from short term pricing behaviors.
The indicator contributes to us seeing the overbought and oversold zones. The returns that will be realized from these zones become the transaction strategy with the current reference levels and curves. Here, above level 80 is saved as the overbought zone and below level 20 is saved as the oversold zone.
The% K curve is the main curve, while the % D curve is a line we should pay attention to for the BUY – SELL signal. The% D curve is the simple moving average of the% K curve. This means, by taking the average of the 3-period simple moving, we get the % D curve.
To access the Stochastic Oscillator indicator from the MetaTrader platform, you can respectively click on ToolBar, Insert, Indicator, and finally, Oscillator.
Before adding it to the platform, you can revise the levels of 20 and 80 in the “Levels” section and two curves named %K ve %D in the “Parameters” section to make them suitable for the financial asset subject to trade. However, in the training, such change won’t be made and the standard pattern will be followed.
The Positive Or Negative Condition of Stochastic Oscillator!
One of the most essential things to pay attention to while making a trade decision for a financial asset is having a strategy where you pay more attention to the view where over level 20 is POSITIVE and below level 80 is NEGATIVE. Within this period, the BUY-SELL signals can turn into a strategy with following the possible returns realized by the reference levels of the % K and% D curves. The blue colored line we see in the graphic as the standard is accepted as the %K curve and the red one is accepted as the %D curve. For this reason, the possible signals the %D signal gives via cutting the %K signal is important for the asset subject to trade.
To be able to follow the “SELL” signal for any financial asset, in addition to the return that goes below the reference level of 80 or occurs in the vicinity of this zone, the %D curve needs to break the %K curve downward.
To be able to follow the “BUY” signal for any financial asset, in addition to the return that goes below the reference level of 20 or occurs in the vicinity of this zone, the %D curve needs to break the %K curve upwards.
In the graph shared above, you can see the BUY and SELL signals are realized in line with the scenarios we mentioned. An important reminder here is when we analyze the graph again, we can see that the blue downtrend line is in the negative expectation regarding the asset. In a period when we ask if the trend line is moving outside of the line and is changing, we can see that the Stochastic Oscillator indicator gives the SELL signal and takes an important step regarding the trend view continuity. For this reason, the indicators are tools that need to be followed closely for successful strategies. However, it shouldn’t be forgotten that we need additional auxiliary tools to minimize the risks in our investment decisions.
Stochastic Oscillator – Divergence!
The incompatibility between the asset pricing and the Oscillator indicator, which helps us see the overbought and overbought zones might be on the agenda in some periods.
This section which is taken into consideration as Positive Or Negative incompatibility, our main focus point is price asset. The related incompatibility removes the buy-sell signal until the price and the indicator are compatible.
If the Oscillator indicators which help us see the overbought and oversold zones are used alone, the times of incompatibility will affect trade performance negatively. Thus, no indicator should be used alone.
When we analyze the graph shared above, we see that even though the Stochastic Oscillator indicator makes a downward pressure, the price behavior moves in a positive direction. To minimize the risks in a situation like this , you can wait until the price is compatible with the indicator, and in addition to that, you can use another indicator, technical analysis tools, and follow the process more closely. After a while, the price becomes compatible with the indicator and proceeds in the system where it left off.